The Australian Financial Review
27 November 2016
On behalf of the financial planning and accounting communities, your correspondent would like to take this opportunity to thank Treasurer Scott Morrison for the most significant superannuation reform package in nearly a decade.
Changes to the retirement savings rules, especially complicated, tectonic plate-shifting ones such as those which will be introduced on July 1 next year, help to justify the existence of a variety of occupations, including government relations and policy experts, lawyers, super fund administrators and a good number of staff at the Tax Office (not to mention financial journalists).
But the biggest beneficiaries will surely be financial advisers and accountants, who will spend the next seven months demonstrating their expertise by explaining the changes to their clients and ensuring that they remain on the right side of the law.
For what it is worth, this reporter’s advice to readers who think they might be caught by any of the reforms, which include placing a $1.6 million ceiling on the amount of money that can be held in a tax-free pension, lowering the annual pre-tax contributions limit to $25,000 and reducing the non-concessional contributions caps to $100,000 a year, would be to not wait until June next year to start getting your super affairs in order.
But by the same token, there is probably little point in contacting your adviser just yet, as the chances are they are a long way from getting their heads around the package and all its implications.
The fear is that not every professional adviser will have a sound understanding of the rules in time to help their clients.
As one industry insider conceded last week: “Clearly [mistakes] can happen with complex rules. There is going to be the odd false start.”
The reform package may help to make the super system more equitable and sustainable, but simple it ain’t.
In skiing terms, savers who have more than $1.6 million in super can consider themselves to be the top of a black run, with the highest degree of difficulty.
Let’s look at just one example: the segregation of assets between a tax-free pension account and an accumulation account, which will house any excess amounts over $1.6 million.
It is probably worth retirees at least thinking about which assets should be held in the pension account, given there is no ceiling on how far the value can rise due to market gains, and which assets should be held in an accumulation account.
So far so good. There are various theories on the best split of assets.
Then we get to the issue of tax. If the superannuant is in a self-managed super fund, they will not be able to segregate their assets for tax purposes. An actuary will work out the tax on a proportionate basis across the two accounts.
However, if the superannuant holds their assets on a large platform, such as in a retail fund, they will be able to segregate their assets for tax purposes as well as asset allocation purposes, and so might like to think about which of their accounts should hold fully franked shares.
If they were held in an accumulation account, they could be used to reduce the tax bill.
Would it be worth switching from a self-managed super fund onto a platform in order to maximise the tax benefits?
Curiously, while self-managed super funds are at a disadvantage in the example above, members of such funds appear to have one big advantage over members of garden variety pooled super funds.
A self-managed fund with more than $1.6 million of assets is able to re-set the cost base of the investments to any date between November 9 and June 30, so that assets that are placed into an accumulation account are able to lock in the tax-free capital gains that have been accrued thus far.
But accountants fear that the majority of pooled super funds will not be able to do the same for their members, lumping them with bigger capital gains tax bills.
It’s a brave new world out there.